Call Options Or Put Options On Barrick Gold (ABX)?

| February 27, 2013 | 0 Comments

Barrick Gold (ABX) is one of the largest gold miners in the world.    

ABX currently trades for $31.26 per share.  The shares are down 36% from the 52-week high of $49.11.  After touching a new 52-week low of $30.14 at the end of last week, the shares have rebounded nearly 4% this week.

Is this an opportunity buy call options on ABX after they came clean about the true cost to mine an ounce of gold?  Or should you buy put options on ABX as their costs soar and gold prices fall?

The bulls make a convincing argument…

Barrick Gold – and many other gold miners for that matter – haven’t fared well as gold prices plummeted from nearly $1,700 in January to under $1,560 last week.  But their stocks are rebounding this week as gold prices climbed back above $1,600 per ounce. 

If gold prices continue to rebound, it should help fuel a rally in ABX as well.

What’s more, mining companies are doing their best to regain investor confidence. 

In the last year, six CEOs of North American gold miners have been replaced.  And Barrick’s new CEO Jamie Sokalsky has a great plan for ABX going forward. 

To start with, they’ve revised the way they report their costs per ounce of gold they produce to be more accurate.  There’s also a return to focusing on profit margins instead of how many ounces of gold they can pull out of the ground at any expense. 

Put simply, ABX is getting back to the things that will drive shareholder value. 

The combination of a bullish reversal in gold prices along with a new game plan to increase profitability and drive shareholder value should spark a strong rally in ABX in the weeks ahead.

But the bears have a compelling case as well… 

If you only knew that gold prices are up 62% over the last five years, you’d likely think a gold mining stock would have performed well over that time as well. 

But in ABX’s case, you’d be dead wrong.  Amazingly, over the last five years the stock has fallen 38%, while gold prices have soared 62%. 

For years, the gold mining industry has tried to hoodwink uneducated investors about how much money gold miners could make. Essentially the problems stem from ABX touting their “cash costs” to produce an ounce of gold. 

It was easy to see if ABX’s “cash cost” to mine an ounce of gold was $626 and gold prices were at $1,600… they had some pretty amazing margins.        

Unfortunately, “cash costs” are significantly lower than the real expenses of running a gold mining operation.  As a result, ABX never really makes $1,000 per ounce on the gold the mine. 

The years of over promising and under delivering has disappointed many investors along the way.  And it has certainly contributed to ABX dramatically underperforming the strong rise in gold prices. 

Now after years of just getting by while gold prices are going through the roof, ABX is in for a rough time as costs climb but gold prices fall.  That’s a recipe for a sharp drop in ABX in the coming weeks.

If you think the bulls are right, take a look at buying the ABX May 2013 $33.00 calls for around $1.00.

If you think the bears are right, take a look at buying the ABX May 2013 $30.00 puts for around $1.10.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.